Concern China banks under-reporting bad loans

Lenders could be giving some toxic debts generous reclassifications

By

WenXiu

HuoKan

BEIJING (Caixin Online) — Recent figures show that the amount of toxic assets at commercial banks remained relatively low, but regulators are concerned that the real conditions of the credit business might be worse than the data suggests.

By the end of September, the amount of outstanding non-performing loans (NPLs) at all commercial banks in the country increased by 63 billion yuan ($10.11 billion) from nine months ago, reaching 0.97% of all outstanding loans, up from the 0.9% at the end of June, the China Banking Regulatory Commission (CBRC) said.

Of all 16 banks that have released the third-quarter results, only Industrial and Commercial Bank of China
IDCBY, +1.04%1398, +0.53%601398, -0.33%
and Agricultural Bank of China
1288, +0.28%601288, +0.00%
managed to reduce both the value and the ratio of NPLs from the previous quarter’s levels. The figures at nine other banks all increased compared with three months earlier.

About Caixin
Caixin is a Beijing-based media group dedicated to providing high-quality
and authoritative financial and business news and information through
periodicals, online and TV/video programs.
• Get the Caixin
e-newsletter

Even though the ratios are still below many economists’ cautious estimate of 2%, the banking regulator is apparently worried as it examines factors that reflect loan quality from other perspectives.

Above all others, banks are given considerable leeway in determining whether a loan is toxic or not. Classifying a loan as one notch above NPL status, referred to as “special mention,” allows banks to suppress the level of bad loans and avoid drawing extra reserves for potential loss.

This was probably a tactic banks were using. Several CBRC officials who oversee banks’ loan classifications say that the amount of special-mention loans is high, and up to 10% of loans in that group had been miscategorized.

Understating the risk seemed to have only delayed the onset of problems.

From July to September, 3.75% of special mention loans were downgraded to NPLs, data from banks’ quarterly report shows. In monetary terms, the change was a 65% increase from the same period of one year earlier.

Loans tied to local government financing platforms and property developers were a particular cause for concern, a senior CBRC official said in a recent regulatory meeting.

Some banks masked the default risk of these loans by manipulating their classifications, extending debt rollovers and lending in the form of wealth management products, he said.

By the end of June, the latest figure available shows that the amount of special-mention loans to the property sector was 208 billion yuan
USDCNY, +0.0316%
up 15.2% year on year.

Many banks also face significant risk from exposure to local government debts, the official said, because banks that underwrote bonds issued by platform companies usually hold a large amount of the bonds, which makes the bank vulnerable still to local governments’ liquidity strains.

In some cases, some platform companies had defaulted on their loans and there were signs of possible contagion to other enterprises, but banks moved too slowly to take precautions, he said.

Scraping by

About half of all defaulters were small and family businesses, CBRC data shows. Many steel manufacturers have also stopped making payments.

One bank estimated total outstanding NPLs for steel companies at 230 billion yuan, most of which were in the Yangtze River Delta.

The real conditions could be worse, a large bank’s risk manager said. Under most circumstances, he said, business owners would use all possible means including borrowing from private lenders to avoid damaging their credit record with banks.

“As long as a firm can still scrape by, it will by all means struggle to prevent itself from being ‘blacklisted’ by banks” for loan default, he said.

Some bankers expect the bad loan problem to continue worsening this year, even though the broader economy has shown signs of recovery.

“There was a sign of relief upon the third quarter’s economic indicators,” a large bank’s executive said. “But the quality of bank loans may deteriorate further for a while because its change lags behind that of the economy.”

Another bank executive predicted that “towards the end of this year, non-performing loans would emerge intensively.”

A recent report by Orient Asset Management Corp., one of the country’s four state-owned companies charged with cleaning up commercial banks’ bad loans, said Chinese banks would have to deal with up to 5 billion yuan worth of bad loans.

As usual, banks would dispose of more NPLs in the fourth quarter. This year, however, they could be dealing with a hard sale, especially compared to three years ago, a bank’s NPL disposal executive said.

Intraday Data provided by SIX Financial Information and subject to terms of use.
Historical and current end-of-day data provided by SIX Financial Information.
All quotes are in local exchange time. Real-time last sale data for U.S. stock quotes reflect trades reported through Nasdaq only.
Intraday data delayed at least 15 minutes or per exchange requirements.